Australian dollar gains on hawkish RBA and supple US PCE data

The AUD rose against the USD on a decline in US inflation and a potential dovish stance from the Fed.
US PCE data could benefit Australian policy divergence between RBA and Fed
Delayed interest rate cuts by the RBA could strengthen the Australian currency, which is at odds with interest rate reduction strategies pursued by other G10 central banks.

Friday’s session saw a significant augment in the value of the Australian dollar (AUD) against the US dollar following an unexpected drop in US inflation in May. As a result, expectations regarding a potentially dovish stance by the Federal Reserve (Fed) have increased, leading to a likely policy divergence with the Reserve Bank of Australia (RBA).

The Australian economy shows little signs of weakness. However, elevated inflation rates remain stubbornly resilient, preventing the RBA from implementing potential rate cuts. The RBA is expected to delay rate cuts, making it one of the last G10 central banks to adopt a reduction policy. These delayed cuts could add further strength to the Australian dollar.

Daily Market Factors Review: Aussie continues to rally on solid CPI data

Available data shows that the strength of the Australian dollar has been boosted by increased expectations of further RBA interest rate increases following the release of warm Consumer Price Index (CPI) data earlier this week.
Market indicators are currently pricing in a roughly 40% chance of a 25 basis point RBA rate hike on 24 September and up to 50% by 5 November.
Inflation in the US fell to 2.6% y/y in May from 2.7% in April, according to the US Bureau of Economic Analysis. This decline was in line with market expectations.
On a month-over-month basis, the Personal Consumption Expenditures (PCE) price index was flat. The core PCE price index rose 2.6%, down from a 2.8% augment in April.
As a result, this downtrend toward the Fed’s 2.0% target raised the probability of a Fed rate cut in September to 66%, from 64% prior to the PCE release, according to the CME FedWatch tool.

Technical Analysis: AUD/USD Maintains Buyer Interest Above 20-Day Moving Average

From a technical perspective, the indicators showed signs of recovery, with the Relative Strength Index (RSI) holding above 50 and the Moving Average Convergence Divergence (MACD) printing a fresh green bar. Defending the 20-day Simple Moving Average (SMA) at 0.6640 will be crucial for the pair’s future momentum. As long as buyers manage to stay above this key level, future prospects seem promising.

It is worth noting that the pair managed to re-rise above the 20-day SMA on Friday after falling to the 0.6620 low, a key signal that buyer defense remains forceful.